Does any magic remain?

Chrysler has dodged doomsday before, now it needs to pull off one more trick

Maryann N. Keller

Chrysler just might be the cat that's now in its ninth life. Should Chrysler survive on its own because of government arm-twisting, its future will remain in doubt.

The market certainly hasn't voted to keep Chrysler alive; it (and GM) would already be in bankruptcy today without government assistance. And it could be forced to go through what government officials call a "quick rinse bankruptcy." But the go-forward game plan for Chrysler with Fiat cars and UAW ownership has no future without new Jeep, Dodge and Chrysler products and a lot more cash, and that's the rub in this cat's life.

Looking back, each time the economy cycled into a recession since the mid-1970s, Chrysler had products in the pipeline that ultimately revived the company. Think back to the Omni and Horizon, the Aries and Reliant K cars, the minivan and, of course, the innovative styling of the cab-forward LH cars.

Whenever it looked like the end of the road for Chrysler, the product development guys, often working with shoestring budgets, were able to dazzle car buyers with creative design coupled with clever, if not a bit over-the-top, advertising.

It was the promise of the Aries and Reliant that got Washington to agree to loan guarantees in 1979. The minivan defined family transportation for a generation and the cab-forward sedans gave back seat passengers legroom not possible in previous designs. As the economy recovered, Chrysler's market share and profits soared on the popularity of its new models.

This time it's different. There is no dazzling model waiting in the wings to save the day.

Daimler eviscerated product development, the lifeblood of a car company, after it took over Chrysler in 1998. During the past few years, Chrysler dealers have done yeoman's work selling Commanders, Aspens, Nitros and less-than-competitive sedans. The lack of product has caused Chrysler to fall further and further behind the competition. The promise of a few small Fiats isn't going to cut it. In the short term, Chrysler dealers will continue to close.

Daimler had sucked the genius out of Chrysler, just as I predicted in 1998. Once former Chrysler CEO Dieter Zetsche got promoted, he and his cohorts caught the last plane to Stuttgart, leaving behind wreckage that is beyond repair.

In 2007, Chrysler needed deep pockets and extreme patience. Instead, it got ... well you know what it got: Private equity owners whose comments about restoring an American icon were just so many words. Their notion of fixing Chrysler was to pile on debt as they showed the door to the few remaining people who knew anything about making cars.

For Cerberus, Chrysler was a financial deal where the buyers thought the pieces could be more valuable than the whole. So the motor company was separated from its captive finance company, which Cerberus hoped to combine with GMAC (and still does), and from valuable pieces of its own real estate, on which I suspect the motor company has been paying a hefty rent.

Through several rounds of cost cutting, Cerberus tried to keep Chrysler afloat by reducing cash burn, which eliminated any possibility of producing viable future products. Daimler and Cerberus have written off their investment in the motor company. Although Cerberus likely will exit from any role in the motor company, Cerberus still controls Chrysler Financial. How it relates to and supports the future Chrysler remains to be seen.

Cerberus officials seemed to know they were acquiring a hollow auto business since they immediately spoke about forming partnerships and affiliations to compensate for the lack of homegrown models. The notion that other auto companies would team up with Chrysler to supply it with vehicles was naïve.

I cannot think of an example where Auto Company "A" successfully sold cars made for it by auto company "B." Think of the failure of Chrysler's Mitsubishi models or the current dud, the Volkswagen Routan. During the last 30 years, auto companies have rebadged cars from competitors or even their overseas subsidiaries, among them the Pontiac G8 by Holden, the Pontiac Vibe by Toyota, the Mercury Merkur by Ford Europe, the Isuzu Ascender, to name a few. Every one of them was a failure.

Chrysler, Dodge and Jeep are very defined brands that have built their heritage on ruggedness and power. How these defined brands translate into small Italian cars remains to be seen. There is no shortage of small, fuel-efficient cars in the United States, and they are languishing on dealers' lots. The only way to get Americans to buy them is to convince Americans that gasoline prices will get more expensive each year through an increased gas tax, which no one in Congress is willing to do.

But Chrysler's future seems to rest on the politics of small, fuel-efficient cars and protection of union labor. Washington doesn't seem to understand that no auto company, not Toyota, not Honda, not Hyundai or Kia or Ford, earns a profit on their small cars. So the future Chrysler won't have new models that preserve its market share while staking its future on small Italian cars on which the best result will be that it doesn't lose too much money.

Even without having to pay interest on debt and with lower labor costs, Chrysler will need much more than $6 billion to keep going.

The company has burned through $4 billion since December. No reasonable person can believe Chrysler can stretch $6 billion indefinitely while supporting the capital investment needed to prepare the cars and the assembly plants to build Fiat cars in the United States. Given the risks, I cannot imagine any lender stepping up with new loans. So it's going to be the American taxpayer who shoulders this burden.

As of this moment, the apparent winners are the secured debt holders. The secured lenders to Chrysler know the risks and although politics had to play a role in their decision to exit, they are getting cash. That is a victory for them compared to getting a 10 percent stake in a company that could ultimately be worthless whether through a future bankruptcy or dilution associated with future rounds of government largess.

Their reluctance to take a stake in a Fiat-managed, United Auto Workers-controlled Chrysler makes sense. They would have no voice in the business, which will be operated for the benefit of Fiat and the UAW. This is an experiment that will challenge any lender now and in the future.

The big investment banks made their big mistake in 2007 when they decided to underwrite the Chrysler financing and got stuck with the bonds when they couldn't unload them on investors. Chrysler's secured lenders figured out long ago that the company had no future as a stand-alone business and argued that the assets, which they could claim in bankruptcy, had value. They maintained that in bankruptcy the assets, especially the entire Jeep division, the minivans and the Dodge Ram had enough value to take the risk of bankruptcy. But a cash settlement is cleaner and allows them to move on.

Chrysler does have valuable assets. Whether they maintain their value with virtually no one in the future management with any tenure in Chrysler or who understands its brands, its dealer body and its customers adds to the risk of slow death.

Governments in other countries have tried to save car companies before. In Britain, the nationalization of carmakers was a disaster, resulting in the government selling off Land Rover and Jaguar to Ford.

The risk for the taxpayer is that Chrysler is about to be quasi-nationalized. Once again, we know how that plays out.

Maryann Keller is head of Maryann Keller and Associates, an automotive consulting firm, a director of the Dollar Thrifty car rental firm and the author of two books on the industry. E-mail: letters@detnews.com